INSTALLED BUILDING PRODUCTS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes in "Item 1. Financial Statements" of this Form 10-Q, as well as our 2021 Form 10-K.
OVERVIEW
We are one of the nation's largest insulation installers for the residential new construction market and are also a diversified installer of complementary building products, including waterproofing, fire-stopping and fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving, mirrors and other products throughoutthe United States . We offer our portfolio of services for new and existing single-family and multi-family residential and commercial building projects in all 48 continental states and theDistrict of Columbia from our national network of over 220 branch locations. 94% of our net revenue comes from the service-based installation of these products across all of our end markets and forms our Installation operating segment and single reportable segment. Additionally, we manufacture and distribute certain building products and materials to installers and distributors involved with various types of construction projects and these two operations form our Manufacturing operating segment and our Distribution operating segment, respectively. We believe our business is well positioned to continue to profitably grow over the long-term due to our strong balance sheet, liquidity and our continuing acquisition strategy. See "Key Factors Affecting Our Operating Results, COVID-19 Impacts" below for a discussion of short-term impacts to our business. A large portion of our net revenue comes from theU.S. residential new construction market, which depends upon a number of economic factors, including demographic trends, interest rates, inflation, consumer confidence, employment rates, housing inventory levels, foreclosure rates, the health of the economy and availability of mortgage financing. The strategic acquisitions of multiple companies over the last several years contributed meaningfully to our 41.1% increase in net revenue during the three months endedSeptember 30, 2022 compared to 2021.
2022 Third Quarter Highlights
Net revenue increased 41.1%, or$209.4 million to$719.1 million , while gross profit increased 41.9% to$221.3 million during the three months endedSeptember 30, 2022 compared to 2021. The increase in net revenue and gross profit was primarily driven by selling price increases, higher volume of customer jobs completed, and the contribution of our recent acquisitions. We continue to make pricing adjustments to offset the current macroeconomic inflationary trends as evidenced by the 27.1% increase in our price/mix metric. Sales volume increased by 7.5% on a same branch basis. Gross profit margin grew primarily due to higher selling prices and resulting leverage gained on labor and other costs of sales, partially offset by higher material costs caused by supply chain constraints and higher fuel costs. Inflationary pressures continue to contribute to higher material costs, particularly for spray foam and several complementary installed products, as some products continue to be difficult to source near volume and pricing levels secured in prior periods. Certain net revenue and industry metrics we use to monitor our operations are discussed in the "Key Measures of Performance" section below, and further details regarding results of our various end markets are discussed further in the "Net Revenue, Cost of Sales and Gross Profit" section below. As ofSeptember 30, 2022 , we had$203.4 million of cash and cash equivalents,$25.0 million of short-term investments, and we have not drawn on our revolving line of credit, which we amended and extended during the three months endedMarch 31, 2022 , increasing the commitment to$250.0 million from$200.0 million . This strong liquidity position allowed us to return capital to shareholders through purchasing$12.5 million of our Company's stock and declaring a quarterly dividend of$0.315 per share, or$9.0 million in the aggregate, during the three months endedSeptember 30, 2022 . Additionally, we received$25.5 million from amending the maturity dates on our three interest rate swaps during the three months endedSeptember 30, 2022 .
We utilize certain net revenue and industry metrics to monitor our operations.
At the beginning of 2022, we realigned our operating segments to reflect recent
changes in our business as described in Part I, Item 1, "Note 10 - Information
on Segments." In conjunction with this realignment, we modified the key metrics
we use to monitor company and segment performance. Specifically, we now present
total sales growth and same branch growth metrics for our consolidated results,
our Installation reportable segment and our Other category consisting of our
Distribution and Manufacturing operating segments. In addition, our volume
growth and price/mix growth metrics are now only presented for the Installation
reportable segment to align with how we monitor our operations. While these
changes do not significantly alter the prior period metrics previously
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--------------------------------------------------------------------------------disclosed, prior period Manufacturing operating segment growth metrics were reclassified from our Installation segment metrics to the Other category metrics.
The following table shows key measures of performance we utilize to evaluate our
results:
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Period-over-period Growth
Consolidated Sales Growth 41.1 % 21.2 % 38.2 % 18.4 %
Consolidated Same Branch Sales Growth (1) 28.5 % 11.2 % 26.2 % 8.9 %
Installation (2)
Sales Growth (3) 33.5 % 21.3 % 31.9 % 18.2 %
Same Branch Sales Growth (1)(3) 28.4 % 11.2 % 26.2 % 8.6 %
Single-Family Sales Growth (4) 39.2 % 24.1 % 38.2 % 20.1 %
Single-Family Same Branch Sales Growth
(1)(4) 35.3 % 16.0 % 32.8 % 12.8 %
Multi-Family Sales Growth (5) 33.9 % 18.2 % 29.7 % 17.0 %
Multi-Family Same Branch Sales Growth
(1)(5) 32.9 % 10.9 % 28.9 % 7.0 %
Residential Sales Growth (6) 38.4 % 23.2 % 36.8 % 19.6 %
Residential Same Branch Sales Growth
(1)(6) 34.9 % 15.1 % 32.1 % 11.8 %
Commercial Sales Growth (7) 16.0 % 17.5 % 14.4 % 12.1 %
Commercial Same Branch Sales Growth (1)(7) 2.8 % (0.2) % 4.4 % (5.0) %
Other (2)
Sales Growth (8) 657.3 % 23.0 % 567.5 % 44.0 %
Same Branch Sales Growth (1)(8) 44.3 % 23.0 % 43.8 % 44.0 %
Same Branch Sales Growth - Installation
(2)(9)
Volume Growth (1)(10) 7.5 % 4.7 % 7.9 % 10.4 %
Price/Mix Growth (1)(11) 27.1 % 7.4 % 22.2 % (0.3) %
U.S. Housing Market (12)
Total Completions Growth 6.5 % (2.1) % 2.3 % 5.9 %
Single-Family Completions Growth 8.1 % 1.5 % 5.4 % 6.9 %
Multi-Family Completions Growth 5.6 % (9.6) % (5.3) % 4.3 %
(1) Same-branch basis represents period-over-period growth for branch locations owned
greater than 12 months as of each financial statement date.
(2) Prior period disclosures have been recast to conform to the current period segment
presentation.
(3) Calculated based on period-over-period growth of all end markets for our Installation
segment.
(4) Calculated based on period-over-period growth in the single-family subset of the
residential new construction end market for our Installation segment.
(5) Calculated based on period-over-period growth in the multi-family subset of the
residential new construction end market for our Installation segment.
(6) Calculated based on period-over-period growth in the residential new construction end
market for our Installation segment.
(7) Calculated based on period-over-period growth in the total commercial end market for our
Installation segment. Our commercial end market consists of heavy and light commercial
projects.
(8) Calculated based on period-over-period growth in our Other category which consists of
our Manufacturing and Distribution operating segments. Our distribution businesses were
acquired in December, 2021 and April, 2022.
(9) The heavy commercial end market, a subset of our total commercial end market, comprises
projects that are much larger than our average installation job. This end market is
excluded from the volume growth and price/mix growth calculations as to not skew the
growth rates given its much larger per-job revenue compared to the average jobs in our
remaining end markets.
(10) Calculated as period-over-period change in the number of completed same-branch jobs
within our Installation segment for all markets we serve except the heavy commercial end
market.
(11) Defined as change in the mix of products sold and related pricing changes and calculated
as the change in period-over-period average selling price per same-branch jobs within
our Installation segment for all markets we serve except the heavy commercial market,
multiplied by total current year jobs. The mix of end customer and product would have an
impact on the year-over-year price per job.
(12)
We believe the revenue growth measures are important indicators of how our
business is performing, however, we may rely on different metrics in the future.
We also utilize gross profit percentage as shown in the following section to
monitor our most significant variable costs and to evaluate labor efficiency and
success at passing increasing costs of materials to customers.
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--------------------------------------------------------------------------------Net Revenue, Cost of Sales and Gross Profit
The components of gross profit were as follows (in thousands):
Three months ended September 30, Nine months ended September 30,
2022 Change 2021 2022 Change 2021
Net revenue $ 719,114 41.1 % $ 509,763 $ 1,983,355 38.2 % $ 1,434,927
Cost of sales 497,837 40.7 % 353,879 1,372,966 37.1 % 1,001,730
Gross profit $ 221,277 41.9 % $ 155,884 $ 610,389 40.9 % $ 433,197
Gross profit percentage 30.8 % 30.6 % 30.8 % 30.2 %
In addition to acquisitions, net revenue increased during the three and nine
months ended September 30, 2022 primarily due to increased selling prices and
organic growth from our existing branches as evidenced by the volume and
price/mix metrics shown in the Key Measures of Performance section above. During
the three and nine months ended September 30, 2022 , we experienced growth in all
of our end markets and we achieved 28.5% and 26.2% year-over-year same branch
sales growth, respectively. Installation revenue increased 33.5% and 31.9% for
the three and nine months ended September 30, 2022 , respectively, driven by
strong growth in the residential new construction, repair and remodel, and
commercial markets. Our largest end market, the single-family subset of the
residential new construction market, grew revenue 39.2% and 38.2%, respectively,
over the same periods ended September 30, 2021 . The vast majority of the growth
in this end market was organic, attributable to price gains and more favorable
customer and product mix with the remainder attributable to growth in the number
of completed jobs. In our commercial end market, continued challenges associated
with the COVID-19 pandemic had an impact, as evidenced by modest increases of
2.8% and 4.4% in same branch sales within this end market during the three and
nine months ended September 30, 2022 , respectively. See "Key Factors Affecting
Our Operating Results, COVID-19 Impacts" below for further information. The
remaining overall growth in net revenue for both the three and nine months ended
September 30, 2022 is attributable to the recent acquisitions of AMD
Distribution and Central Aluminum which form our Distribution operating segment.
This operating segment, combined with our Manufacturing operating segment, grew
from $6.3 million to $47.7 million for the three months ended September 30, 2022
and from $17.2 million to $114.7 million for the nine months ended September 30,
2022 .
As a percentage of net revenue, gross profit improved during the three and nine
months ended September 30, 2022 compared to the corresponding prior year periods
primarily on the strength of sales growth across all end markets as well as
strong price/mix growth. However, ongoing industry wide supply chain issues
continue to impact our operating efficiency, driving our material costs higher.
In order to meet customer demand during the quarter, we purchased materials from
distributors and home centers at a premium to what we typically would purchase
directly from manufacturers. During the three and nine months ended September
30, 2022 , we estimate these purchases increased materials expense by
approximately $1.2 million and $3.6 million , respectively, therefore reducing
gross profit by approximately 20 basis points for both periods. While inflation
and material supply chain issues are likely to persist throughout the remainder
of 2022 and into 2023, we will continue to work with our suppliers to lessen the
impact on our margins and with our customers to offset further cost increases
through selling price adjustments.
Operating Expenses
Operating expenses were as follows (in thousands):
Three months ended September 30, Nine months ended September 30,
2022 Change 2021 2022 Change 2021
Selling $ 31,651 30.9 % $ 24,188 $ 86,214 27.4 % $ 67,677
Percentage of total net revenue 4.4 % 4.7 % 4.3 % 4.7 %
Administrative $ 84,345 23.9 % $ 68,056 $ 247,519 24.0 % $ 199,607
Percentage of total net revenue 11.7 % 13.4 % 12.5 % 13.9 %
Amortization $ 11,370 23.3 % $ 9,224 $ 33,728 25.9 % $ 26,798
Percentage of total net revenue 1.6 % 1.8 % 1.7 % 1.9 %
Selling
The dollar increase in selling expenses for the three and nine months ended
September 30, 2022 was primarily driven by an increase in selling wages and
commissions to support our increased net revenue of 41.1%. Selling expense as a
percentage of sales decreased for the three and nine months ended September 30,
2022 compared to 2021 primarily due to increased leverage on selling wages from
increased sales.
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Administrative
The dollar increase in administrative expenses for the three and nine months endedSeptember 30, 2022 was primarily due to an increase in wages and benefits, insurance and facility costs from acquisitions and to support organic growth. Administrative expenses decreased as a percentage of sales for the three and nine months endedSeptember 30, 2022 compared to 2021 primarily due to the leverage gained on administrative employee expenses and facility costs from increased sales.
Amortization
The increase in amortization expense for the three and nine months ended
Other Expense, Net
Other expense, net was as follows (in thousands):
Three months ended September 30 , Nine months ended September 30 ,
2022 Change 2021 2022 Change 2021
Interest expense, net $ 10,668 38.8 % $ 7,687 $ 31,669 39.0 % $ 22,781
Other expense (income) 185 138.3 % (483) 698 241.3 % (494)
Total other expense, net $ 10,853 $ 7,204 $ 32,367 $ 22,287
The increase in interest expense, net during the three and nine months ended
September 30, 2022 compared to 2021 was primarily due to the increase in debt
levels. See Note 7, Long-Term Debt, for more information.
Income Tax Provision
Income tax provision and effective tax rates were as follows (in thousands):
Three months ended September 30, Nine months ended September 30,
2022 2021 2022 2021
Income tax provision $ 22,080 $ 12,320 $ 55,857 $ 27,432
Effective tax rate 26.6 % 26.1 % 26.5 % 23.5 %
During the three and nine months ended September 30, 2022 , our effective tax
rates were 26.6% and 26.5%, respectively. The rates for both periods were
favorably impacted by recognition of a windfall tax benefit from equity vesting.
Each rate for the three and nine months ended September 30, 2021 was also
favorably impacted by recognition of a windfall tax benefit due to equity
vesting.
Other Comprehensive Income (Loss), Net of Tax
Other comprehensive income (loss), net of tax was as follows (in thousands):
Three months ended September 30 ,
Nine months ended
2022 2021 2022 2021
Net change on cash flow hedges, net
of taxes $ 14,379 $ 1,292 During the three months endedSeptember 30, 2022 , we amended the maturity dates for our three existing interest rate swaps. These swaps had unrealized gains of$51.2 million at the amendment date ofJuly 8, 2022 . These unrealized gains will be amortized as a decrease to interest expense, net through the original maturity date ofApril 2030 . See Note 11, Derivatives and Hedging Activities, for more information. During the three and nine months endedSeptember 30, 2022 , we recorded unrealized gains of$13.5 million and$40.6 million , net of taxes, respectively, on our cash flow hedges due to the market's expectations for higher interest rates in the future relative to our three existing interest rate swaps and our two forward interest rate swaps. We also amortized$1.1 million and$2.8 million of our remaining unrealized gains and losses, net, on our terminated cash flow hedges to interest expense during the three and nine months endedSeptember 30, 2022 , respectively, not including the offsetting tax effects of$(0.3) million and$(0.7) million , respectively. 32 -------------------------------------------------------------------------------- During the three months endedSeptember 30, 2021 , we recorded an unrealized gain of$0.7 million , net of tax, and amortized$0.8 million of our remaining unrealized loss on our terminated cash flow hedges, not including the offsetting tax effect of$(0.2) million . During the nine months endedSeptember 30, 2021 , we recorded an unrealized gain of$6.0 million , net of tax, and amortized$2.4 million of our remaining unrealized loss on our terminated cash flow hedges, not including the offsetting tax effect of$(0.6) million .
KEY FACTORS AFFECTING OUR OPERATING RESULTS
Inflation and Interest Rates
The fast recovery in residential housing demand helped offset prolonged impacts of the pandemic already experienced. However, the strong demand for residential housing has caused inflationary pressure on materials. Inflation has also affected the economy as a whole as consumer price inflation has reached 40-year highs, negatively impacting consumer sentiment and increasing market uncertainty. TheFederal Reserve aims to moderate and stabilize inflation as it has raised the federal funds rate multiple times in 2022 and has signaled plans to continue raising this rate throughout 2022 and into 2023. This caused the average mortgage rate inthe United States to almost double since the end of 2021. Rising interest rates began to curtail housing demand in the second and third quarters of 2022, reducing mortgage financing affordability. While we believe the demand for our installation services remains high due to the large residential construction backlog of both units under construction and units not started, we are closely watching our residential markets for signs of a slowdown in demand that could result from these risks.
Cost and Availability of Materials
We typically purchase the materials that we install directly from manufacturers, and the products we sell are either purchased from manufacturers or other suppliers or are manufactured by us. Since the beginning of the COVID-19 pandemic, the industry supply of many of the materials we install has been disrupted. The higher demand for materials coupled with supply chain issues including raw material shortages, supplier labor shortages, bottlenecks and shipping constraints has forced us to buy some materials at higher prices through distributors and local retailers to meet customer demand, therefore reducing gross profit. The pandemic has also resulted in the need for some of our manufacturers to allocate materials across the industry which has affected the pricing and availability of those materials. We expect the supply chain disruptions affecting most of the materials used throughout our installation work to continue throughout 2022 and into 2023. We will continue to prioritize the effective management of our supply chain by our purchasing, logistics and warehousing teams. In addition, we experience price increases from our suppliers from time to time, including multiple increases over the last few years caused by supply shortages and general economic inflationary pressures. During the three and nine months endedSeptember 30, 2022 , we saw increased pricing for certain insulation materials as well as many of the other products we install and expect manufacturers to seek additional price increases during the year. The increase in demand, inflationary pressures, product shortages and other supply constraints caused these material price increases to be larger and more frequent than in a normal business cycle. Increased market pricing, regardless of the catalyst, has and could continue to impact our results of operations throughout the remainder of 2022, to the extent that price increases cannot be passed on to our customers. We will continue to work with our customers to adjust selling prices to offset higher costs as they occur. See "COVID-19 Impacts" below for a discussion of the short-term impacts of the current economic climate on the availability of the materials we install.
Cost of Labor
Our business is labor intensive and the majority of our employees work as installers on local construction sites. We expect to spend more to hire, train and retain installers to support our growing business in 2022, as tight labor availability continues within the construction industry. We offer a comprehensive benefits package, which many of our local competitors are not able to provide, which will increase costs as we hire additional personnel. Our workers' compensation costs may continue to rise as we increase our coverage for additional personnel. We obtained leverage on our labor costs in the three and nine months endedSeptember 30, 2022 compared to 2021 due to increased selling prices per job, however, inflation and market competition could increase these costs in the near-term. We experienced strong employee retention, turnover and labor efficiency rates in the three and nine months endedSeptember 30, 2022 . We believe this is partially a result of various programs meant to benefit our employees, including our financial wellness plan, longevity stock compensation plan for employees and assistance from theInstalled Building Products Foundation meant to benefit our employees, their families and their communities. While improved retention drives lower costs 33
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to recruit and train new employees, resulting in greater installer productivity, these improvements are somewhat offset by the additional costs of these incentives.
COVID-19 Impacts
The COVID-19 pandemic has caused significant volatility, uncertainty and economic disruption. While the COVID-19 pandemic and related events will likely have a negative effect on our business during the remainder of 2022, the full extent and scope of the impact on our business and industry, as well as national, regional and global markets and economies, depends on numerous evolving factors that we may not be able to accurately predict, including the duration and scope of the pandemic, additional government actions taken in response to the pandemic, the impact on construction activity and demand for homes (based on employment levels, consumer spending and consumer confidence). The fast recovery in residential housing demand helped offset prolonged impacts of the pandemic already experienced. However, we have experienced supply constraints and material price increases ultimately stemming from the effects of the pandemic across most of the products we install or sell, which we expect to continue throughout 2022. In the commercial sector, we have experienced some impact to our commercial business, mainly in the form of project start delays and inefficiencies due to social distancing requirements in some areas. In the future, certain large-scale infrastructure programs may be at risk if the need for such structures decline, project funding declines or as consumer behaviors change in the wake of COVID-19 disruptions to the economy and changes to our general ways of life. For example, reduced demand for office buildings and/or educational facilities, decreased airport traffic, or decreased usage of sports arenas or similar commercial structures could impact our commercial end market. We continue to evaluate the nature and extent of the COVID-19 pandemic's impact on our financial condition, results of operations and cash flows. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES Act") was signed into law. The CARES Act provides numerous tax provision and other stimulus measures. We benefited from the temporary suspension of the employer portion ofSocial Security taxes by deferring$20.7 million of payments in 2020. 50% of the amount was paid onDecember 31, 2021 and the remaining 50% will be paid onDecember 31, 2022 . It is important to note that this does not impact the timing of the expense, only the timing of the payment.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources primarily consist of cash from operations and borrowings under our various debt agreements and capital equipment leases and loans. As ofSeptember 30, 2022 , we had cash and cash equivalents of$203.4 million , short-term investments of$25.0 million , as well as access to$250.0 million under our asset-based lending credit facility (as defined below), less$52.4 million of outstanding letters of credit, resulting in total liquidity of$426.0 million . This total liquidity was reduced by$4.3 million within our cash and cash equivalents due to a deposit into a trust to serve as additional collateral for our workers' compensation, general liability and auto policies. This amount can be converted to a letter of credit at our discretion and would reduce the availability of our asset-based lending facility (as defined below). Liquidity may also be limited in the future by certain cash collateral limitations under our asset-based credit facility (as defined below), depending on the status of our borrowing base availability. We experienced unprecedented increases in pricing for certain insulation materials in 2021 and the first three quarters of 2022 and expect manufacturers to seek additional price increases in the remainder of 2022 and into 2023. Increased market pricing on the materials we purchase has and could continue to impact our results of operations in 2022 due to the higher prices we must pay for materials. See Part I, Item 1A, Risk Factors on the 2021 Form 10-K, for information on the potential and currently known impacts on our business and liquidity from the COVID-19 pandemic.
Short-Term Material Cash Requirements
Our primary capital requirements are to fund working capital needs, operating expenses, acquisitions and capital expenditures, to meet principal and interest obligations and to make required income tax payments. We may also use our resources to fund our optional stock repurchase program and pay quarterly and annual dividends. In addition, we expect to spend cash and cash equivalents to acquire various companies with at least$100.0 million in aggregate net revenue acquired each fiscal year. The amount of cash paid for an acquisition is dependent on various factors, including the size and determined value of the business being acquired. We expect to meet our short-term liquidity requirements primarily through net cash flows from operations, our cash and cash equivalents on hand and borrowings from banks under the Master Loan and Security Agreement, the Master Equipment 34 --------------------------------------------------------------------------------
Agreement and the Master Loan Agreements. Additional sources of funds, should we need them, include borrowing capacity under our asset-based lending credit facility (as defined below).
We believe that our cash flows from operations, combined with our current cash levels and available borrowing capacity, will be adequate to support our ongoing operations and to fund our business needs, commitments and contractual obligations for at least the next 12 months as evidenced by our net positive cash flows from operations for the three and nine months endedSeptember 30, 2022 and 2021. We believe that we have access to additional funds, if needed, through the capital markets to obtain further debt financing under the current market conditions, but we cannot guarantee that such financing will be available on favorable terms, or at all. In the short-term, we expect the seasonal trends we typically experience to vary from historical patterns, with the last quarter of 2022 and first half of 2023 experiencing stronger volumes than the second half of 2023 due to the large industry backlog of projects either in process or authorized but not started. This could affect the timing of cash collections and payments during the fourth quarter of 2022 and each quarter of 2023.
Long-Term Material Cash Requirements
Beyond the next twelve months, our principal demands for funds will be to fund working capital needs and operating expenses, to meet principal and interest obligations on our long-term debts and finance leases as they become due or mature, and to make required income tax payments. Additional funds may be spent on acquisitions, capital improvements and dividend payments, at our discretion. On a long-term basis, our sources of capital could be insufficient to meet our needs and growth strategy. We may refinance existing debt or obtain further debt financing in the future to the extent that our sources of capital are insufficient. In "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2021 Form 10-K, we disclosed that we had$1.1 billion aggregate long-term material cash requirements as ofDecember 31, 2021 . There have been no material changes to our cash requirements during the period covered by this 10-Q outside of the normal course of our business.
Sources and Uses of Cash and Related Trends
Working Capital
We carefully manage our working capital and operating expenses. As ofSeptember 30, 2022 andDecember 31, 2021 , our working capital, including cash and cash equivalents and investments, was$539.5 million and$551.7 million . Accounts receivable increased$102.9 million resulting from our increased net revenue, and inventories increased by$39.1 million due to material price inflation, increased selling activity and acquisitions. These increases were partially offset by an increase of$23.4 million in accounts payable primarily due to material price inflation and increased sales volume. We continue to look for opportunities to reduce our working capital as a percentage of net revenue.
The following table summarizes our cash flow activity (in thousands):
Nine months ended
2022 2021
Net cash provided by operating activities $ 198,667
$ 116,478 Net cash used in investing activities (139,935)
(121,609)
Net cash used in financing activities (188,815) (34,954)
Cash Flows from Operating Activities
Our primary source of cash provided by operations is revenues generated from installing or selling building products and the resulting operating income generated by these revenues. Operating income is adjusted for certain non-cash items, and our cash flows from operations can be impacted by the timing of our cash collections on sales and collection of retainage amounts. The COVID-19 pandemic has not had a material impact on our cash collections to date.
Our primary uses of cash from operating activities include payments for installation materials, compensation costs, leases, income taxes and other general corporate expenditures included in net income.
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Net cash provided by operating activities increased from 2021 to 2022 primarily
due to the increases in net income, a $25.5 million cash receipt for amending
our interest rate swaps and various noncash adjustments, offset by certain
increases in working capital requirements aimed at reducing material shortages
in a supply constrained environment.
Cash Flows from Investing Activities
Sources of cash from investing activities consist primarily of proceeds from the sales of property and equipment and, periodically, maturities from short term investments. Cash used in investing activities consists primarily of purchases of property and equipment, payments for acquisitions and, periodically, purchases of short term investments. Net cash used by investing activities increased from 2021 to 2022 primarily due to the purchase of short-term investments during the nine months endedSeptember 30, 2022 , partially offset by the maturities of some of these purchased short-term investments and less spent on acquisitions so far in 2022. See Note 5, Investments and Cash and Cash Equivalents, for more information on our investments.
Cash Flows from Financing Activities
Our sources of cash from financing activities consists of proceeds from the issuances of vehicle and equipment notes payable and, periodically, other sources of debt financing. Cash used in financing activities consists primarily of debt repayments, acquisition-related obligations, dividends and stock repurchases.
Net cash used by financing activities increased from 2021 to 2022 primarily due to the repurchase of common stock under our stock repurchase plan during the nine months endedSeptember 30, 2022 . Our net cash used by financing activities also increased during the nine months endedSeptember 30, 2022 due to the payment of our first annual dividend of$0.90 per share which was in addition to regular quarterly dividend payments. See Note 12, Stockholders' Equity, for more information on the repurchase of common stock and the payment of dividends.
Debt
5.75% Senior Notes due 2028
InSeptember 2019 , we issued$300.0 million in aggregate principal amount of 5.75% senior unsecured notes (the "Senior Notes"). The Senior Notes will mature onFebruary 1, 2028 and interest is payable semi-annually in cash in arrears onFebruary 1 andAugust 1 , commencing onFebruary 1, 2020 . The net proceeds from the Senior Notes offering were$295.0 million after debt issuance costs. The indenture covering the Senior Notes contains restrictive covenants that, among other things, limit the ability of the Company and certain of our subsidiaries (subject to certain exceptions) to: (i) incur additional debt and issue preferred stock; (ii) pay dividends on, redeem or repurchase stock in an aggregate amount exceeding 2.0% of market capitalization per fiscal year, or in an aggregate amount exceeding certain applicable restricted payment baskets; (iii) prepay subordinated debt; (iv) create liens; (v) make specified types of investments; (vi) apply net proceeds from certain asset sales; (vii) engage in transactions with affiliates; (viii) merge, consolidate or sell substantially all of our assets; and (ix) pay dividends and make other distributions from subsidiaries.
Credit Facilities
InDecember 2021 , we amended and restated our$500 million , seven-year term loan facility dueDecember 2028 (the "Term Loan") under our credit agreement (the "Term Loan Agreement"), dated as ofDecember 14, 2021 with Royal Bank of Canada as the administrative agent and collateral agent thereunder. The amended Term Loan amortizes in quarterly principal payments of$1.25 million starting onMarch 31, 2022 , with any remaining unpaid balances due on the maturity date ofDecember 14, 2028 . The Term Loan bears interest at either the base rate (which approximates the prime rate) or the Eurodollar rate, plus a margin of (A) 1.25% in the case of base rate loans or (B) 2.25% in the case of Eurodollar rate loans. Proceeds from the Term Loan were used to refinance and repay in full all amounts outstanding under our previous term loan agreement. We intend to use the remaining funds to pay for certain fees and expenses associated with the closing of the Term Loan and for general corporate purposes, including acquisitions and other growth initiatives. As ofSeptember 30, 2022 , we had$490.2 million , net of unamortized debt issuance costs, due on our Term Loan. 36 -------------------------------------------------------------------------------- Subject to certain exceptions, the Term Loan will be subject to mandatory prepayments of (i) 100% of the net cash proceeds from issuances or incurrence of debt by the Company or any of its restricted subsidiaries (other than with respect to certain permitted indebtedness (excluding any refinancing indebtedness); (ii) 100% (with step-downs to 50% and 0% based on achievement of specified net leverage ratios) of the net cash proceeds from certain sales or dispositions of assets by the Company or any of its restricted subsidiaries in excess of a certain amount and subject to reinvestment provision and certain other exception; and (iii) 50% (with step-downs to 25% and 0% based upon achievement of specified net leverage ratios) of excess cash flow of the Company and its restricted subsidiaries in excess of$15.0 million , subject to certain exceptions and limitations. InFebruary 2022 , we amended and extended the term of our asset-based lending credit agreement (the "ABL Credit Agreement"). The ABL Credit Agreement increased the commitment under the asset-based lending credit facility (the "ABL Revolver") to$250.0 million from$200.0 million , and permits us to further increase the commitment amount up to$300.0 million . The amendment also extends the maturity date fromSeptember 26, 2024 toFebruary 17, 2027 . The ABL Revolver bears interest at either the base rate or the Secured Overnight Financing Rate ("Term SOFR"), at our election, plus a margin of 0.25% or 0.50% in the case of base rate loans or 1.25% or 1.50% for Term SOFR advances (in each case based on a measure of availability under the ABL Credit Agreement). The amendment also allows for modification of specified fees dependent upon achieving certain sustainability targets, in addition to making other modifications to the ABL Credit Agreement. In connection with the Term Loan Agreement, we entered into a Third Amendment (the "Third Amendment") to the ABL/Term Loan Intercreditor Agreement withBank of America, N.A ., as ABL Agent for the lenders under the ABL Credit Agreement, and Royal Bank of Canada as collateral agent under the Term Loan Agreement. Including outstanding letters of credit, our remaining availability under the ABL Revolver as ofSeptember 30, 2022 was$197.6 million . All of the obligations under the Term Loan and ABL Revolver are guaranteed by all of the Company's existing restricted subsidiaries and will be guaranteed by the Company's future restricted subsidiaries. Additionally, all obligations under the Term Loan and ABL Revolver, and the guarantees of those obligations, are secured by substantially all of the assets of the Company and the guarantors, subject to certain exceptions and permitted liens, including a first-priority security interest in such assets that constitute ABL Priority Collateral, as defined in the ABL Credit Agreement, and a second- priority security interest in such assets that constitute Term Loan Priority Collateral, as defined in the Term Loan Agreement. The ABL Revolver also provides incremental revolving credit facility commitments of up to$50.0 million . The terms and conditions of any incremental revolving credit facility commitments must be no more favorable than the terms of the ABL Revolver. The ABL Revolver also allows for the issuance of letters of credit of up to$100.0 million in aggregate and borrowing of swingline loans of up to$25.0 million in aggregate. The ABL Credit Agreement contains a financial covenant requiring the satisfaction of a minimum fixed charge coverage ratio of 1.0x in the event that we do not meet a minimum measure of availability under the ABL Revolver. The ABL Credit Agreement and the Term Loan Agreement contain restrictive covenants that, among other things, limit the ability of the Company and certain of our subsidiaries (subject to certain exceptions) to: (i) incur additional debt and issue preferred stock; (ii) pay dividends on, redeem or repurchase stock in an aggregate amount exceeding the greater of 2.0% of market capitalization per fiscal year or certain applicable restricted payment basket amounts; (iii) prepay subordinated debt; (iv) create liens; (v) make specified types of investments; (vi) apply net proceeds from certain asset sales; (vii) engage in transactions with affiliates; (viii) merge, consolidate or sell substantially all of our assets; and (ix) pay dividends and make other distributions from subsidiaries. AtSeptember 30, 2022 , we were in compliance with all applicable covenants under the Term Loan Agreement, ABL Credit Agreement and the Senior Notes. Derivative Instruments As ofSeptember 30, 2022 , we had three active interest rate swaps and two forward interest rate swaps. OnJuly 8, 2022 , we amended the maturity dates of our three active interest rate swaps. Prior to the amendment, we held one interest rate swap with a$200.0 million notional, a fixed rate of 0.51% and a maturity date ofApril 15, 2030 . We also had two interest rate swaps, each with a$100.0 million notional, a fixed rate of 1.37% and a maturity date ofDecember 15, 2028 . As amended, each of these three swaps have a maturity day ofDecember 31, 2025 with the other terms unchanged. We also entered into two new forward interest rate derivatives inJuly 2022 . One forward interest rate swap has an effective date ofDecember 31, 2025 , a beginning notional of$300.0 million and a fixed rate of 3.09%. The other new forward interest rate swap also has an effective date ofDecember 31, 2025 , a beginning notional of$100.0 million and a fixed rate of 2.98%. For further information about our interest rate swaps, see Note 11, Derivatives and Hedging Activities. The assets and liabilities associated with the interest rate swaps are included in other non-current assets and other current liabilities on the Consolidated Balance Sheets at their fair value amounts as described in Note 9, Fair Value Measurements. 37 -------------------------------------------------------------------------------- LIBOR is used as a reference rate for our Term Loan and our interest rate swap agreements we use to hedge our interest rate exposure. For more information on the discontinuance of LIBOR, see Item 3. Quantitative and Qualitative Disclosures about Market Risk below.
Vehicle and Equipment Notes
We have financing loan agreements with various lenders to provide financing for the purpose of purchasing or leasing vehicles and equipment used in the normal course of business. Vehicles and equipment purchased or leased under each financing arrangement serve as collateral for the note applicable to such financing arrangement. Regular payments are due under each note for a period of typically 60 consecutive months after the incurrence of the obligation.
Total outstanding loan balances relating to our master loan and equipment
agreements were
Letters of Credit and Bonds
We may use performance bonds to ensure completion of our work on certain larger customer contracts that can span multiple accounting periods. Performance bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. In addition, we occasionally use letters of credit and cash to secure our performance under our general liability, workers' compensation and auto insurance programs. Permit and license bonds are typically issued for one year and are required by certain municipalities when we obtain licenses and permits to perform work in their jurisdictions.
The following table summarizes our outstanding bonds, letters of credit and cash-collateral (in thousands):
As of September 30 , 2022
Performance bonds $ 77,971
Insurance letters of credit and cash collateral 58,514
Permit and license bonds 9,420
Total bonds and letters of credit $ 145,905
We have$4.3 million deposited into a trust as ofSeptember 30, 2022 to serve as additional collateral for our workers' compensation, general liability and auto policies. This collateral is included in the table above and can be converted to a letter of credit at our discretion and is therefore not considered to be restricted cash.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported using different assumptions or under different conditions. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our consolidated financial statements. There have been no significant changes to our critical accounting policies and estimates during the nine months endedSeptember 30, 2022 from those disclosed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our 2021 Form 10-K.
Recent Accounting Pronouncements
For a description of recently issued and/or adopted accounting pronouncements, see Note 2, Significant Accounting Policies, to our audited consolidated financial statements included in the 2021 10-K.
38
--------------------------------------------------------------------------------Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, including with respect to the housing market and the commercial market, economic and industry conditions, our financial and business model, payments of dividends, the impact of COVID-19 on our business and end markets, the demand for our services and product offerings, trends in the commercial business, expansion of our national footprint and end markets, diversification of our products, our ability to grow and strengthen our market position, our ability to pursue and integrate value-enhancing acquisitions, our ability to improve sales and profitability, our efforts to navigate the material pricing environment, our ability to increase selling prices, our material and labor costs, supply chain and material constraints, the impact of COVID-19 on our financial results and expectations for demand for our services and our earnings in 2022. Forward-looking statements may generally be identified by the use of words such as "anticipate," "believe," "estimate," "project," "predict," "possible," "forecast," "may," "could," "would," "should," "expect," "intends," "plan," and "will" or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Any forward-looking statements that we make herein and in any future reports and statements are not guarantees of future performance, and actual results may differ materially from those expressed in or suggested by such forward-looking statements as a result of various factors, including, without limitation, the duration, effect and severity of the COVID-19 crisis; the adverse impact of the COVID-19 crisis on our business and financial results, our supply chain, the economy and the markets we serve; general economic and industry conditions; increases in mortgage interest rates and rising home prices; inflation and interest rates; the material price and supply environment; the timing of increases in our selling prices; the risk that the Company may reduce, suspend or eliminate dividend payments in the future; and the factors discussed in the "Risk Factors" section of our 2021 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, as the same may be updated from time to time in our subsequent filings with theSEC . In addition, any future declaration of dividends will be subject to the final determination of our Board of Directors. Any forward-looking statement made by the Company in this report speaks only as of the date hereof. New risks and uncertainties arise from time to time and it is impossible for the Company to predict these events or how they may affect it. The Company has no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required by federal securities laws.
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